Paying for big ticket items with a 0 percent credit card from a retailer sounds like a sweet deal. But after the promotion period is over, many consumers could be hit with a very unpleasant surprise: a hefty interest charge.
The average annual interest rate on a store credit card was 23.2 percent in 2014. That's more than 8 percentage points higher than national average for credit cards, according to a survey from credit-card comparison website CreditCards.com.
The interest on many of these store credit lines are deferred, meaning the payments are delayed or postponed.
"The consumer is going to pay that interest at the end of the day. In some instances, they can never get out of it, even if they pay it off quickly," said Sean McQuay, a credit card associate at NerdWallet, which provides online credit-card comparison tools. "The important thing that consumers need to know is the different types of offers."
True, 0 percent APR credit cards completely waive interest payments during the promotional period, which can last months or years. But with store credit cards that have deferred interest payments, if you don't pay off the entire balance before the promotional period ends or miss a payment, then you could be end up with retroactive interest charges on the entire loan.
That's what happened to consumer David Fell. He bought a $2,400 smart television at an electronics store at 0 percent for 24 months. Fell, 49, thought he was done paying his loan, but he was $83 short of paying off the balance. Fell was slapped with a bill for $447, which included a $35 late fee.
"For a simple mistake, it was a really severe punishment," said Fell, who lives in the Chicago area. He said the company stopped billing him, and he couldn't access the online statements, so he assumed the loan was paid off.
Once you're done paying off your loan, call the credit company and verify you're paid off, credit card experts say, and ask if they can send you a letter stating that you've paid in full.
Advertisements for store credit cards sound the same, but the terms can vary widely.
"There are so many different policies," said Jeanne Kelly, a credit-card coach and author of "The 90-Day Credit Challenge." "You have to read the fine print to see which type of account you're getting into."
The fine print is hard to understand, but there are key words such as "accrue" or "deferred interest" that will help you figure out the type of credit you're being offered. If the terms of the credit are confusing, it's better to take the form home and read it more closely. If you still have questions, call the credit card issuer and ask questions until you know what you're getting yourself into, McQuay said.
Look out for when the interest starts. In some cases, the interest will begin accruing in weeks instead of months, the Consumer Financial Protection Bureau warns. That means for each month, you're accumulating interest on that month's balance, and that can add up.
In a case like this, you should pay off as much as you can each month, McQuay said. That way you'll reduce your balance each month and lower how much you pay in interest.